As Ben Bernanke tries to save the US Economy, investors are trying to find some certainty about future economic conditions. Flipping a coin may be more productive than trying to predict growth or recession. This is an environment for diversification in every way.
We've been heavily on the subject of fixed-income and how to build the bond portion of your portfolio. The reason for this focus is because economic growth, which is a certainty at some point in the not-too-distant future, will mark the beginning of what has been mostly a 30-year bull market run for bond mutual funds. If you recall your bond basics, bond prices move in opposite direction of yields or the prevailing interest rates. With rates at historic lows now, it is inevitable that we are closer to the bottom of yields, and thus closer to the top of prices, than at any time in the past three decades. In fewer words, prices will begin falling some time soon. We just don't know exactly when.
When faced with such a conundrum, the wise investor pulls out the greatest tool for uncertainty--diversification. For the mutual fund investor, such diversity can be created by using a portfolio structure called Core and Satellite. When applied to bond investing, the mutual fund investor can use a bond mutual fund as the "core" and individual bonds and satellites.
This will accomplish a type of hedge on either side of the economic coin: If fear sets back in and investors run to Treasuries and other bonds, prices will rise and the bond mutual fund core fund will increase in value. If the worst is behind us and the economy crawls out its current funk, bond prices will fall but your individual bond satellites will continue to provide income and you won't lose value (principal) as long as you continue to hold your bond.
For more info on this, be sure to check out my article on How to Choose and Buy Bonds.
